Why The $20 Billion Should Be A Grant

It’s late and I’m not up to a full thrashing-out of this issue, but just say I’m one of those who favors making the Iraqi rebuilding money a grant rather than a loan. Spoons has a good detailed post on the issue and makes a valid point: it is NOT treasonous to suggest that the money be in the form of a loan. I’m surprised that has to even be mentioned, but Spoons can take comfort in the fact that people usually resort to charges of treason to close off debate, whether they win or not.

My reasons are the one’s Spoons listed, with the exception of gratitude. The Iraqis will likely NOT be all that grateful that we liberated them from Saddam’s industrial plastic shredders, political prisons and the like. If anything, given Arab machismo, they’ll likely feel resentment and shame that it was necessary for an outside force to liberate them. That’s OK. We didn’t do it for them, we did it for us.

The first, and best, reason is practical: the last time I checked they have over $200 billion in loans to repay that Saddam accrued and even their vast oil reserves won’t be enough to pay that off. If anything we’ll be pressuring countries to forgive the debt.

Let’s make a few extremely optimistic assumptions regarding their ability to produce oil: they can produce 500,000 barrels a day at a market price of $30 / barrel. They produce 365 days a year. That gives them a GDP of $5,475,000,000 or roughly $5.5 billion dollars a year. You can’t finance a $200 billion debt on that little revenue, and that doesn’t count the cost of production which will run, at least initially, around $4 or $5 a barrel — I’m guessing, since Russia costs around $5 or $6 a barrel and they have to deal with outmoded equipment and cold weather. By contrast, Saudi Arabia produces oil at a cost of about $1 a barrel.

Eventually Iraq will approach that, but only after large investments have been made. It’s simply not feasible for them to repay the money for reconstruction, and remember I used very optimistic targets for production and price.

To me, that alone is reason enough to make it a grant and not a loan. We’ll be repaid over the years by having Iraq producing at full capacity — which they haven’t done in well over a decade — with lower prices at the pump. Iraq will also act as a counterweight to Saudi Arabia once their oil industry has matured.

That seems like a persuasive argument for a grant rather than a loan. The financial argument is the clincher.

On the argument that opponents of the war will say it was about the oil, this will give them an opening, however pathetic. Better to close it off and provide a grant.

On the “we broke Iraq, we must fix it” argument, I’ll likewise admit that it’s largely garbage. Iraq has been broken for a long time. However, we have a history dating to WW2 of rebuilding countries we attack and occupy. I see no reason to end that tradition now. By funding much of the reconstruction — they should begin to cover the costs after our fiscal year 2005 ends — we maintain influence and make the transition to democracy more likely and more stable.

For me the financial argument is the winning argument. There’s no way they can finance a debt that’s forty times their GDP — very optimistic GDP, I should add. In fact, my assumptions are probably double that of Iraq’s GDP in the next few years.

UPDATE: There’s another reason the money for Iraqi reconstruction should be a grant rather than a loan. According to news reports I’ve read, Iraq has a middle class and a relatively well-educated populace. They appear to be the best hope for an Arab democracy. By providing a grant and pressuring other countries to forgive their debts we’ll be giving them a chance to reach their potential, and they are more likely to do so than any other Arab country. In other words, it’s a good bet on our part.

ANOTHER UPDATE: Even using my optimistic numbers — which overstate Iraq’s ability to produce oil in the near term and likely overstate the price of a barrel of oil once they’re at full production — Iraq would not even be able to finance the interest on the $200 billion unless the interest rates average out to 2% or 3%. Highly unlikely, and it would still take centuries to pay off the debt at that rate.

One consideration that’s positive for Iraq: oil won’t be their only source of income, hopefully, because that industry won’t be enough to employ the whole country and they are educated, meaning they can do other things and have a diverse economy. That’s not accounted for in the figures, but it’s an unknown and even if they became capitalists and highly productive, paying off $200 billion would still be impossible. They only have 25 million people.

I should also add that this creates a rather striking parallel with post-WW1 Germany. Germany, unable to pay off the debts of the war decided to inflate her currency to try to pay for the war debts. Of course, this didn’t work because it devalued the currency and as the value of the currency spiraled downward, massive economic instability was created.

Now, keep in mind, I’m not saying any of this is our fault, but it does instruct us on how we need to behave with regard to Iraq and our own reconstruction spending, in addition to the $200 billion that is owed from the Saddam years. In short, not only do we need to make our own spending a grant, we need to work feverishly to get the $200 billion forgiven.

Without the income to finance the debt, Iraq will bleed itself dry trying to pay the debt and breed economic instability by either having much of the population permanently unemployed — no investment will enter the country because of the debt — or by inflating their currency. In Germany, this lead to the rise of Hitler and, considering that Ba’athist is just the Arab word for Nazi and we just deposed a Ba’athist, it’s not unlikely that a Ba’athist or some other authoritarian leader will come along. The other option would be that Iraq goes the way of Somalia and ends up in anarchy and acts as a shelter and breeding ground for terrorists.

Either way, if we don’t work to remedy Iraq’s debt situation we will have gone in there for no reason. We’ll leave Iraq with the potential to be as bad or, if one can imagine, worse than before.

YET ANOTHER UPDATE: As pointed out in comments below, I got caught with my pants down. Iraq’s oil production will likely be in 1 million barrel a day area and that would double my projection for GDP. It’s good news but doesn’t change the underlying conclusion: Iraq can’t finance or repay $200 billion in debt and the $20 billion should be a grant.

Another thing that struck me on the DOE page is that $40 billion of the debt is actually reparations to Kuwait for the first Gulf War. It seems to me we can go after that chunk ferociously and tell Kuwait that, given we saved their asses, they can forgive the reparations. That still leaves the weasels and others to deal with, but it’s a great starting point.

As for the $20 billion being a good investment in democracy in the Middle East, I should have been more clear. For instance, rebuilding Tunisia as a democracy would be foolish because it lacks strategic importance and is not a state sponsor of terrorism. We are doing this for ourselves and our own security, not as an act of generosity. Lebanon is a Syrian puppet, though putatively a free state. Iraq borders Syria giving us a good deal of influence over Syria. If we wish to rebuild an Arab country as a democracy, Iraq is the best bang for the buck. It also leaves us with troops on the borders of Iran, the leading state-sponsor of terrorism.

Finally, on the Iraqi middle class, every news report I’ve read or seen has said that the Iraqi people are relatively well educated when compared to other Arab countries. I’m open to disproof on this as with other areas.